The key to making meaningful improvements is obtaining actionable insights. This means not only collecting data but also analyzing it in ways that allow you to create and implement improvement plans that actually make or save you money. The solution is to divide the data into logical sub-groups that have like characteristics.
There are four common types of segmentation:
- Value based, which facilitates implementing different levels of service for different value customers.
- Behavior based, which enables the company to customize based upon what it knows about the customer.
- Insight based, which is developed from customer information and transactional data. Again, allows customization of approach and communication.
- Needs based, which is predicated on knowing that different customers have different needs. This links product features and brand attributes to customer actions.
For example, when we set up our Sales organization we have many options. Nevertheless, one factor is generally implemented – Sales territories (behavior based segmentation). This is not only to control travel expenses but also aligns the people with customers because different territories generally have different cultures, needs, and business practices. Thus, there are very few global businesses that do not have regional Sales-VP for the Americas, EMEA (Europe, Middle East, Africa) and APAC (Asia/Pacific). And matrixed on top of geography are product specialists who know a lot about a few products but know them really well.
Another use of segmentation is cost analysis. For this discussion I will focus on warranty costs for Medical devices. I chose this specific example because I have been a reader of Warranty Week for about 10 years and they recently published an interesting analysis of this topic. And the story was compelling.
The people at Warranty Week have been tracking actual warranty costs, warranty accruals (budgeted warranty costs that are replaced by actuals each month), and product sales. As they began to dig into the numbers, they found that by segmenting the data they had a very compelling story. Here is what they said:
“To illustrate a specific trend within the medical and scientific equipment sector, we’ve further divided the 177 companies into two sub-groups. First, we’re isolating 24 companies whose medical or scientific equipment makes heavy use of lasers, X-rays, or other types of radiation. Second, we’re presenting separate data for the remaining 153 companies, whose products do not make use of lasers, X-rays, or other types of radiation.”
Clearly, two separate segments.
Of all the charts in the article, I think this one best tells the whole story:
Here is what Warranty Week says about their analysis:
“There’s another big difference. The non-laser/non-X-ray group, containing 153 companies and accounting for roughly 85% of the total claims and accruals, has done little over the past 10 years to reduce its expense rates. They started the decade towards the high end of the 0.5% to 1.0% range, and ended it towards the middle or low end of that range.
However, the laser/X-ray group has made spectacular progress, dropping their average expense rates from 2.5% to 3.0% of revenue in 2003-2006 to 1.5% to 2.0% in 2010-2012. And rather decisively, the group ended 2012 with its lowest-ever claims rate (1.6%) and second-lowest-ever accrual rate (1.7%). It’s also beginning to lose the seasonal pattern, keeping rates steady-but-declining year-round.
So while the laser/X-ray group suffers from higher warranty expense rates, they’re also demonstrating that they’re better at both reducing and stabilizing those.”
A 10-year declining trend is no accident. Many people in different companies (including suppliers) have been working very hard to save money. How much money? In 2012 the Laser and X-ray equipment warranty claims paid were $126 million – not small potatoes!
Segmentation is not just for looking at your customers but also for all aspects of your business. It should be a way of looking at all your numbers, otherwise you lump everything together and get some meaningless answers.